tv Capitol Hill Hearings CSPAN December 13, 2012 6:00am-7:00am EST
economic projections -- our forecast is that will inflation will remain, despite the threshold of 2.5%, that inflation will remain at or below going forward. finally, the thresholds that we have put out are entirely consistent with our long standing views and what the rate path has to be, the path of interest rates, in order to achieve improvement in the labour market while keeping inflation tote -- close to target. i think both sides of the mandate are real well served. it is an attempt to clarify the relationship between policy and economic conditions. >> given that your economic projections are all the more important now that you have specified these targets, is it
difficult to put forward these projections now given the uncertainty over the fiscal cliff? how plastics are these? >> are you talking about the ions?roject and stac clearly the fiscal cliff is having an affect them, even though we have not reached the point of it kicking in. it is already affecting business and hiring investment by creating uncertainty or pessimism. we saw what happened recently to consumer sentiment which fell in part because of concerns about the fiscal cliff. clearly, this is a major risk factor and a major source of uncertainty. i would suspect -- although, the participants don't always make this explicit -- i would suspect what they assume in their projections is that the
fiscal cliff gets resolved and -- in some intermediate way where there is still some fiscal drag but not as much as implied by the entire fiscal cliff. i think that is probably the underlying assumption that most people talk when they made their projections. you're absolutely right that there is a lot of uncertainty right now and of the fiscal cliff situation turns out to be innate way to resolve the differently than we suspect, you will see different forecasts. >> could you talk about whether the decision to maintain the monthly bond purchases at $85 billion per month represents a ramping up of that policy? you could be adding more to the balance sheet now. also, you talked about
maintaining the asset purchases in light of the improvement in the labour market. you got this 6.5% inflation threshold out there. can you talk about what evidence you see to change the pace or slow the pace? >> the first part of your question was -- >> is this an additional stimulus? >> no, i think this is a continuation of what we said in september. we expressed dissatisfaction with progress in the labour market. at that point, we began the $40 -- $40 billion per month of asset purchases and we said unless we see an improvement in the labour market, we would take other actions. that is what we have done today is follow-through what we said we would do in september. i don't think, relative to last month, i don't think we have
significantly added accommodation. in my view, and many of my colleagues, what matters primarily is the mix of assets on the balance sheet. it is important that we are acquiring treasury securities and mbs, taking those out of the market and forcing investment -- investors and two other closely related assets. it is not just the size of the balance sheet, per se. the amount of stimulus is more or less the same, it is a follow-through from what we sought in september. in terms of criteria, we have announced an initial amount of $85 billion per month of purchases. we are prepared to bury that as new information comes in.
if the economy's outlook gets most of the stronger, we will begin to ramp down the level of purchases. the problem with giving a specific number is that there are multiple criteria with which we make this decision. we will look at the outlook of the labour market but we will also look at other factors that may be affecting the outlook for the economy. for example, if the fiscal cliff occurs, i don't think the federal reserve has the tools to offset that the event and in that case, we have to temper our expectations as to what we can accomplish. we will also be looking at the efficacy and cost of our program. if we find it is not working as well as we hoped and that -- and various costs are emerging we
had not anticipated, we will have to take that into account. we do not know precisely what would define a substantial improvement. as long as the cost and other concerns to not emerge, we will be looking for something that is substantial in terms of a better job market. >> peter cook - if i could follow up on your last response -- is it possible if policy makers or not to agree to some sort of deficit deal by the end of this year and we went over the fiscal cliff that the size of these asset purchases could, indeed, growth? you coined the phrase "fiscal cliff" and you think it is the most appropriate language to describe what may happen at the beginning of the year?
some consumers think it may be alarming so do you think it is appropriate? >> if the economy went off the fiscal cliff, our assessment and the cbo assessment and outside forecasters think that would have a significant adverse effects on the economy and the unemployment rate. on the margin, we would try to do what we could. we could perhaps increase a bit. i want to be clear that we cannot offset the full impact of the fiscal cliff. it is just too big given the tools we have available and limitations on our policy tool kit at this point. as far as the terminology, people have different provinces about what they want to call things. i think it is a sensible term because i think that fiscal
policy supporting -- supporting the economy, if it is not done, i think the economy will go off a cliff. i don't buy the idea that a short-term descent of the fiscal cliff would not be costly. we are already seeing costs. why is it that consumer confidence dropped so sharply this week? why did small business confidence dropped so sharply? why are the market's volatile? why is business investment among its weakest levels during the recovery? all of these things can be traced to the anticipation and concern about the fiscal cliff. we don't know exactly what would happen but there is certainly a risk that it could be serious and therefore, i think it is
important that the most helpful thing the congress and the administration can do is find a resolution that achieves long run fiscal sustainability which is absolutely critical for a healthy economy but also avoid derailing the recovery which is currently in the process. >> mr. chairman, i want to square up some numbers, the threshold you announced today when rate hikes might start is 6.5%. the assessment of longer run unemployment is 6% or perhaps a bit lower. in the longer run, the fed funds rate is around 4% according to these projections. it suggests that when the fed started raising interest rates down the road, it might have to move fairly quickly to get to equilibrium at the fed funds
rate. is that the case in more generally, can you talk about what this framework you set up today says about the exit strategy you have laid out some time ago? >> that's a good question. we don't have a precise estimate of the long run sustainable unemployment rate. the estimates that were provided in the summary of economic projections today, as has been the case for a while, is 5.2%-6.5%. that gives us some time. my anticipation is that the removal of accommodation after the takeoff point, wherever that occurs, would be relatively gradual. i don't think we are looking at a rapid increase. that depends on where inflation
is and other conditions but the path that we are basing these numbers on is one that assumes an increase in the funds rate first occurring sometime after unemployment goes below 6.5% but does not necessarily assume a rapid increase after that. we said we would take a balanced approach. when we get to that point, we may or may not raise rates at that point. we will look at the situation. assuming inflation remains well- controlled, which i fully anticipate -- i think to rate of increase would be moderate -- the exit strategy that we put out is consistent with our statement today because the exit strategy was primarily about how
we would normalize the balance sheet over time. we have not made any changes in that and we believe some increase in the size of our balance sheet is consistent with that general sequence that we laid out in the minutes a year and a half ago. that being said, if the balance sheet gross, women have to consider the timing of that but i don't see any changes that would radically change the time for normalization or the time to exit. >> i will continue the two- question trend -- on the fiscal cliff, it sounds like you would prefer fiscal consolidation to support the recovery. if people in congress can add to that in the next two weeks, do you think postponing all fiscal consolidation is preferable to going over the fiscal cliff?
can you also give us more color on how you get to the threshold and what the alternatives were and how you weigh various alternatives within your policy? >> sure, i am hoping that congress will do the right thing on the fiscal cliff. there is a problem with kicking the can down the road. it might avoid a short-term impact but it could create concerns about our longer-term fiscal situation and i don't want to see that. it is in the best interest of the economy to come to a two- parts solution -- part one is to modify fiscal policy in a way that does not create enormous headwinds for the recovery in the near term. part two is to take important steps to achieving a framework, at least, by which further
negotiations, the congress and the administration, can achieve a sustainable path for fiscal policy. both of these parts are imported and i don't think we can consider these negotiations a success unless both of them happen. >> [inaudible] >> i think they are equally important on the threshold numbers, this -- these numbers are based on substantial analysis done by staff here and that the reserve banks, trying to assess under optimal policy or the best policy we can come up with what with the interest rate that look like and how it would be correlated with changes in unemployment and inflation. when we do that analysis, we find that the best interest rate
path, as best as we can determine on our models which is imperfect, has rates remaining low until on employment dropped below 6.5%. it projects -- we put in half a percentage point above the goal as a protection against any problem of price stability but are the actual forecast suggests inflation will not go there but it will stay around 2% which will be consistent for our longer-term objectives. if we get important new information about the structure of the economy, it is possible but i consider relatively unlikely and this is one of the advantages of this approach over the date-based approach. if information comes in which says the economy is stronger or weaker than we expected, that would require a change in the date. it does not necessarily require a change in the threshold
because that date adjustment can be made by markets by looking at their own forecast of what unemployment will be and the behavior of inflation. >> when you were appearing on "60 minutes," you've visited your old home town and you talked a little bit about how the economy had affected people that you grew up with and defected to the people down there. -- and affected the people down there. there are regular people in the countryside wondering what happens to them if we do go over the federal cliff. taxes go up in spending goes down -- do they need to look for recession and are employers really going to cut back on employment? what do people really need to
worry about and prepare for? when it comes to actually going over that fiscal cliff? >> by come from a part of south carolina which has been economically challenged for quite a long time and remain so. certain parts of south carolina have developed strongly but the part where i come from, mostly agricultural and a little bit of manufacturing, has a high unemployment and foreclosure rate and people are having a hard time there. i visited a few times since i became chairman. part of the reason that we are engaging these policies is to try to create a stronger economy with more jobs so that folks across the country, including places like where i grew up, will lead more opportunities to
have better lives for themselves. that is extremely important and i think it is important that we not just look at the numbers. it is easy to look at the unemployment rate. every tenth means many people are represented there in the numbers. it is important to keep in mind the reality of unemployment -- the foreclosure and weaker wage growth so we tried to do that. it is always a delicate balance but you don't want to scare people. i actually believe that congress will come up with a solution and i certainly hope they will. as many analysts have pointed out, if the fiscal cliff was allowed to occur and if it were sustained for any period, it could have a very negative affect on hiring, jobs, wages,
economic activity, investment and the consequences of that would be felt by everybody but certainly by those in areas like where i grew up that are relatively in a week -- in -- are weak economically. it is urgent and important that congress administration come to a sensible agreement on this issue. >> i had a follow-up -- i will not ask about a bond bobbled but the new guidance that you have given in the fmoc state men will give more clues to people on bonds about when they might start lightening up their bond portfolio and changing their composition of what they own.
were concerns about things happening in a big heart rate in bonds -- was that a consideration in adding this transparency? >> i would not say it is an important motivation for adding transparency. transparency has a lot of value but is a factor that is greater clarity will help markets better predict how bond yields will be gave. if the economy continues to strengthen, as we hope, as the exit comes closer for the federal reserve, you would expect longer-term bond yields begin to rise and the more information we can provide to markets about conditionality under which the fed would consider moving accommodation, the better information we will have and that will allow for a smoother adjustments. i think that is a positive aspect of this communication. i would not say it is the major
reason. the major reason is to give the public more transparency about what is determining our policy but that is one potential advantage. >> you said a moment ago that these thresholds were based on analysis of optimal policy. in the october policy in the past, the vice chairman laid out the first interest rates curring in 2016 and rates are rising slowly after that. is that the policy the fed is following? secondly, you referred to a number of inflation forecasts in your introductory remarks. how will we ever know that the inflation threshold has been hit? >> the kind of optimal policy
path that vice chairman yellin showed is indicative of the kind of scenario is we have run. the general character of the interest rate path, that it stays below until unemployment is in the vicinity of 6.5% or lower and then rises relatively slowly which goes back to the question asked earlier that it does not involve a rapid removal of accommodation after that is reached. that is consistent with that kind of analysis and that is the type of analysis that is not the only thing we looked at but was informative and our discussion. in that kind of policy path of the type she discussed, you notice that inflation stays close to 2%.
in terms of the inflation forecast, what the committee will do on a regular basis is include in its statement, its views of where inflation is likely to be one year from now. for example, currently, we expect inflation to run at or below the kid many's objections and the longer term. -- the committee's objections in the longer term. if we maintain low rates along the lines suggested by this policy, would we expect inflation to cross the threshold or reach that level? it is important that the public and of the media and the markets find our projections credible, obviously. for that reason, we will be referring extensively to public available information such as various measures of inflation.
there are outside forecasts, the break evens from inflation- protected bonds. etc. if our outlook deviates in any sense in a significant way from what all these things are saying, it would be incumbent upon me and the rest of us to explain that. my expectation is that our projections will be broadly consistent with public views, public information, and so i think we can manage the credibility issue. to be clear, the projection that matters for our determination is the one that the committee collectively comes up with. >> you have articulated your commitments to reduce unemployment. you have also said you're not actually doing anything more to achieve that goal. you expected to be three years away and you are disappointed
with the pace of progress and inflation is not the limiting factor. what is the limiting factor? what are you not announcing additional ways to reduce unemployment? >> september was the date where we did a substantial increase in accommodation. at that point, we announced our dissatisfaction with the state of the labour market and the outlook for jobs. we said we would take further action if the outlook did not improve. what we have done today is to follow through on what we said. looking at it from the perspective of september, we have taken significant additional actions to provide support for the recovery and job creation. one of the considerations, which i have talked about, is
given that we're in the world of on conventional policy that has both on certain costs and benefits, that creates a somewhat more complicated policy decision than the old style of just changing the federal funds rate. there are concerns that i have talked about in these briefings before that if the balance sheet gets indefinitely large that there would be potential risk in terms of financial stability and market functioning. the committee takes these risks very seriously and they impose a certain cost on policy that does not exist when you're dealing with the federal funds rate. we are trying to balance the potential benefits in terms of lower unemployment and inflationary targets.
as the balance sheet gets bigger, there are greater costs that might be associated in those have to be taken into account. > given those actions, it will be three years until you achieve your goals. is the message "we are doing all we can?" this is the most we can expect? >> first of all, the projections you are looking at -- this is not a committee collective projection. it is 19 separate participants making their own projections based on their own views of policy. it includes those folks who think we should not be doing any more purchases and their forecasts are included in there as well. it is not an apples to apples
comparison. it is true if we could wave a magic wand and get unemployment down 5% tomorrow, we would do that but there are constraints with the dynamics of the economy, in terms of the power of these tools and in terms of the fact that we need to take into account the possibility of other costs and risks that might be associated with a large expansion of our balance sheet. >> just following up on that last question, how helpful would it be to see as part of the resolution some near term stimulus? the president has proposed that. how helpful would that be? what ever happened to your southern accent?
[laughter] >> on the second one, i would like to think i am bilingual. when i go home, sometimes it comes out pretty strongly but i will not try to do that here. i tried to be careful -- try to be careful to not give it views on specific tax programs. those are the province of the administration and congress. the attitude i have taken is that at a minimum congress should try to avoid policies that significantly derail the recovery at this point. along with the long term objective of achieving a sustainable fiscal path. given that basic recommendation, congress can consider variations. for example, if they believe they can achieve a strong,
credible future path for the school policy, that would give -- for fiscal policy, that would give them potentially some space to do more expansionary in the short term but those are judgments i think congress has to make about whether they can simultaneously continue support of fiscal policy in the short term while maintaining the credibility they will be addressing our structural deficit problems in the longer term. that is a question for them and their staff. >> looking over the past year or several years, how would you evaluate the fed accuracy of making economic forecasts and how does that affect decisions connected to the threshold? >> it is fair to say that we
have over estimated the pace of growth, the total output of growth, gdp growth, from the beginning of the recovery. we have therefore had to scale down our estimates of output growth. interestingly, at the same time, we have been more accurate in forecasting unemployment. how do you reconcile those two things? i talked about this in remarks i gave right before thanksgiving. i think the reconciliation is that what we are learning is that at least temporarily the financial crisis may have reduced the underlying potential growth rate of the u.s. economy. it has interfered with business creation, investment, advances, and so on which can account for at least part of the somewhat
slower growth. at the same time, what monetary policy influences is not the underlying structural growth in bank that is for many other different types of policies. monetary policy affects primarily the state of the business cycle, excess unemployment, or the extent of the recession in the economy. there we also under estimated the recession but we have been much closer there. i think therefore we have been able to address that somewhat more effectively with quite accommodative policies. that being said, of course, we have over time as we have seen disappointments in growth and job creation, as we did in
september we have added accommodation and we continue to reassess the outlook. i think it is only fair to say that economic forecasting beyond a few quarters is very, very difficult. what we are trying to do is create a plausible scenario which we think it is reasonably likely but be prepared to adjust as information comes in and as the outlook changes. inevitably, it will. >> thank you, mr. chairman. economists have long believed that single banks cannot affect unemployment in the long run. can you explain if the fed by tying its monetary policy to an unemployment threshold is consistent with that
longstanding view? if so, how is it superior? with the approach that you are now taking be possible if the fed only had a mandate for low inflation? >> it is entirely consistent with the point that you made. as we stated in our january set of principles, the central bank cannot control unemployment in the long run. there is a the bill bit of a caveat here. very extended periods of unemployment can interfere with the workings of the labor market. if the fed were not to address a large and unemployment problem for a long time, it might have some influence in the long term unemployment rate. i think this is the right baseline.
, as a general rule. the long term unemployment rate is determined by a range of structural features of the economy and a range of economic policies and not by monetary policy. that being said, what our 6.5% threshold is as i said not a target. it is a guidepost in terms of when the beginning of the reduction of accommodation could begin. it could be later than that but at least by that time, no earlier than that time. so, it is more like a reaction function or eight taylor role, if you will -- or a taylor rule, -- i'm ready to get a
phone call from john taylor -- but it relates policy to observables in the economy such as unemployment or inflation. it has no implication that we can affect the long run and implement rate which we believe is lower than 6.5%. we think it is somewhere between 5% and 6%. bank. we think providing information from both sides is helpful. i think providing information on unemployment and inflation gives more information to the market to the public that allows them to infer how our policies are likely to evolves. . >> [inaudible]
>> so long as the inflationthat is correct. >> mr. chairman, i would still like to hear more about why you made this announcement today specifically tying federal funds and your policy to the 6.5% number. i am sure you have a theory about what you hope will change in the economy about this announcement. if so, what is it? >> we think it is a better form of communication. we think by using the thresholds which ties rates to economic conditions, we are more transparent about what is going to determine our policy in the future. the date base guidance served a purpose but a had a problem that whenever economic outlook change, the committee was faced with the question of whether we should change the date base guidance. process.
we did change it a couple of times. no one understood why we were making particular changes because we were not providing information about why our economic outlook. i think this approach is to. -- is the superior. . there may be other things we can do in the future to improve our communication but i do think it will allow the market to respond quickly and promptly to changes in the outlook by adjusting when they think rate increases will begin and therefore will act as an automatic stabilizer so if the outlook worsens leaving markets to think that the increase in rates is further out in the future, that will tend to be supportive of the economy which has an automatic stabilizer type of defect. it is a better form of communication. frankly, given that it is a
relatively complex change, it seems like it would be a good idea to do it at a meeting with a press conference. since we're ready to go, we decided why not make the change earlier and get the benefit earlier. >> did you see a level of uncertainty in the business community that you hoped to solve by this announcement? >> at the moment, the expectations of the business community happen to be pretty well aligned. if you look at the federal market indicators, it is pretty consistent with the mid 2015 base guidance we were providing. that was not really the issue.
there was no major inconsistency. the problem is that looking forward, what happens if there is insignificant change either for the better or for the worse in the outlook under the date base guidance? that would require the committee to make that change in a non-transparent way. under this threshold based guidance, the market and the calculation on their own and adjusted their estimates on when rates will increase based on their own forecasts. we just think it is a better approach. >> by mid 2015, the recovery is
going to be six years old. the average recovery has been a little less than five. we are already banking on a very large expansion. your balance sheet is potentially at $4 trillion. if the business cycle runs out of steam and you are at 0%, does the fed no longer have a forceful response in that situation? >> the fed will always -- we have innovated quite a bit in the last few years and is always possible that we can find new ways to support the economy. there is no doubt that with interest rates near 0 and with the balance sheet already large, the ability to provide additional accommodation is not unlimited. that is an argument i think for being more aggressive now. it is a really good objective to get the economy moving, to
get some momentum which protect the economy against unanticipated shocks that occur. so, exactly for those reasons, the kinds of risks that arise when policy interest rates are close to zero and the greater difficulty of providing additional support, i think that is an argument for being somewhat more proactive now while we still have the ability to do that to try to get the economy back to help the-- to healthy conditions. >> my question pertains to the volcker rule. regulators seemed cautiously optimistic they would be able to finalize it by the end of the year but that seems unlikely at this point. lawmakers are calling for a two-tier implementation delay on the rule.
can you tell us where things stand at this point? tothe agency's been able work out their differences? if you may, a prediction on when we will see the rule. >> it is a difficult, complex rule asy ou know. we had 18,000 comments or something like that. it is a lot to look at and there were a lot of concerns that arose even from foreign commenters on the effects of their bond markets. i think there is quite a bit of agreement on key points among regulators at this juncture. of course, if congress gives us other instruction, we will follow that. it is our intent to try to get this done early in 2013 ba.
conference with us, we have had an election. governor romney said he would not reappoint you to a third term as chairman. president obama did not weigh in on the issue but he did win re-election. if the president were to call you and say, "your country needs your continued stewardship at the federal reserve. we need you to stay and finish the job, see this through." would you consider it? would you do it? have you had any conversations to that effect with the president or with his team? >> no, i have not had any conversations. i think the president has quite a few issues he has to be thinking about.
from my own perspective, i really don't have anything to add from the last press conference. i am very much engaged in this difficult issue that we are discussing today and i have not been spending time thinking about my own future and i don't have anything to add there. >> two questions. one. having to do with the cpi's about chain cpi as an economist at. economist. is there a logic in going through that? and again, with the labor market, you talked about the importance of the broader conditions. a big debate talks about people
being beamed to mars. market? are we creating jobs? what is your sense of how quickly it has fallen because of new employment? >> on the first question, the chain cpi is a technical issue. it is technically better according to most economists because it allows for changes in the mix of goods and services that people actually consume more effectively. however, whether that is more appropriate for social security indexing or not is a political decision. i suppose a rejoinder would be neither man necessarily be a particularly good measure for the cost of living for social security recipients.
those are the kinds of questions that congress is going to have to deal with. the second part of your question was -- >> [inaudible] the debate over the extent to which the unemployment rate -- >> yes. you can see the comparison by looking for example at the household survey which gives estimates of how many people are added to the labor force, how many are added to the employed, how many people are leaving the labor force. it is true that over the recovery, part of the decline has come from declines in participation rates which is people leaving the labor force. some of it appears to be due to longer run factors -- aging, the example.
there have been some additional decline in labor force participation which presumably is linked to discouragement about the state of the labor force. that is certainly part of the issue. there has been a good bit of job creation which you can see in the household survey or payroll establishment survey. i think there is no doubt the labor market is better today than it was two years ago. it is also the case that many indicators of the labor market
remained quite weak ranging from the number of longer-term unemployed, at the number of people who have part-time work that would like full-time work, wage growth is obviously very weak, and i could go on. so, it may be that he labor market is even a bit weaker than the current unemployment rate suggests but i think it is nevertheless the case there have been improvements since the trough a couple of years ago. >> how concerned are you that market will have to tank in order to get lawmakers to reach a deal on that this " cliff? is there a washington-wall street disconnect? >> interesting question. i certainly hope that markets will not have to tank.
we want to have confidence not just in market but in businesses and households as well. the best way policy makers cna achieve that is by coming to a solution as quickly as possible. markets have obviously already responded to some extent up and down to news about negotiations. on the other hand, it is also true -- if you look at the experience of the debt limit debate in august 2011, and both confidence and markets remain pretty sanguine up to pretty close to the point where it looked like there was a chance that the debt limit would not be riased.
then, of course, there was a pretty sharp shock to confidence about the time of the final debates. so, it's not unusual to see markets being complacent. of course, from a market point of view, there is at risk to both directions. if things go well, that would be good news and may be right now markets are taking an average of those two possibilities. i don't think any policymaker including the fed should be responding to markets. what we should be doing is making policy based on the fundamentals and doing what is best for the economy. follow that as well.
>> mr. chairman, with the federal government borrowing roughly $1 trillion by year and now with the fed on pace to buy roughly eight trillion dollars a year in bonds, are you concerned about a public and possible global perception that the fed is accommodating not just growth but accommodating federal borrowing needs? are you concerned about what this might do to the fed's credibility and the credibility of u.s. finances in general and the credibility of the dollar as the world's leading currency? of facts. we are buying treasurys and
mortgage-backed securities. we are buying considerably less than the treasury is issuing, and moreover, the share of the outstanding treasurys own it is not all that different from what it was before the crisis because while our holdings have increased, as have the stocks in public hands. it is not quite evident there has been a radical shift there. we have been increasing our balance sheet for some time and we have been very clear that this is a temporary measure and a wya to provide additional accommodation to an economy that needs support. we will normalize the balance sheet either by letting them run off or selling assets in the future. this is only a temporary step.
it would be a quite different matter if we were buying these assets and holding them indefinitely. we are not doing that. we are very clear about our intentions. i think up until now, it seems our credibility has been quite good. there have been no signs of current inflation or strong evidence that there is an increase in inflation expectations. this is one of the things we have to look at. i talked earlier about potential costs of an large balance sheet. we want to be sure there is no misunderstanding or effect on inflation expectations. that is one of the things we have to look at. to this point, there is no evidence that people are taking
it that way. i think is worth pointing out we're not the only central bank that has increased the size of its balance sheet. the japanese, the europeans, the british, they have done the same. i think these sophisticated market players and the public understand that this is part of a need to provide additional accommodation to weak economies and not an accommodation of fiscal policy. >> last but not least. there seems to be growing
evidence that some of the mbs purchases, the impact is banks are holding on to some of the gains and not passing them onto the borrowers. is there anything you can do about that and are you concerned about that? >> the question is about the spread between the mortgage rates that the public pays and the yields to mortgage-backed securities that banks may hold. the question is, is that spread weidening so that the full benefit of the reduction in yields is not being passed through. that is the question. heard it. [laughter] so you could answer it. our analysis suggests that it takes time. two points. the first point is that while we don't expect 100% passed through a of yields to mortgage rates, our empirical and theoretical analysis suggest
that over time, the great majority of the decline in mbs yields does get passed through to mortgage rates. we do anticipate over time that the full benefit or most the benefit will be seen by retail customers. but one thing that is perhaps confusing this issue is there are other things happening in the economy that are affecting those spreads. for example, there are capacity limitations which are allowing banks to charge higher yields. there are extra costs or concerns about putback risk. there are higher fees. there is a number of things
that will raise that spread between mortgage rates and mbs yields. that is unfortunate. what we can try to do is try to encourage good policy that will reduce the perceived risk of cost to banks of making mortgage loans. but again, i think most of those things are not really in our control. again, taking all those issues as a constant, it does seem to be the case that over a period of time, most of the declines in mbs yields do find their way through to mortgage customers and thereby strengthening of the housing market. >> thank you very much.
[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> spam is brought to you by your television provider. -- cspan is brought to you by your television provider. >> a former adviser to president clinton discusses the u.s. economy at the center for american progress. the federal reserve chairman ben bernanke -- yesterday --